Britannia Radio

DON'T PANIC!   Alistair Darling has repeated his daily mantra that he 
will do everything necessary to - - - etc [he doesn't specify what 
ever!]

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PS. The first paragraph below ends "The credit crisis is now moving so 
fast that governments around the world are finding it impossible to 
keep pace".  I know how they must be feeling!
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THE TIMES      6.10.08
Worst-case scenario is approaching rapidly

David Wighton, Business and City Editor

The credit crisis, which has been building slowly for the past year, 
is now moving so fast that governments around the world are finding 
it impossible to keep pace.

On Saturday Angela Merkel, the German leader, criticised last week's 
decision by the Irish to guarantee all deposits in their leading 
banks without consulting other European countries. The Irish 
Government said that the move was forced on it by the threat of a run 
on one of its banks. Only a day later Ms Merkel was forced to take 
almost the same action in almost the same circumstances.

In the longer term, this clearly raises questions about the hopes for 
(or fears of) European financial integration. In the short term, it 
presents serious challenges for other European governments.

A week ago the British Government was hoping that it had coped with 
its immediate banking headache after the bailout of Bradford & 
Bingley. With the proposed rescue takeover of HBOS by Lloyds TSB, 
this stabilised the two big British banks that looked most vulnerable.

Then came the shock move by the Irish Government to guarantee not 
only individual savings but also the large deposits held by 
companies. Downing Street was furious because British banks feared 
they would see a flight of money towards Irish banks.

Downing Street decided merely to accelerate the planned increase in 
the ceiling on guaranteed deposits from £35,000 to £50,000, although 
the decision remains under review.

The Irish move was triggered partly by the failure of Congress to 
vote through the proposed $700 billion bailout package for the 
troubled US banking system. The uncertainty about the package caused 
another blow to confidence in banks around the world, making it even 
more difficult for them to get long-term funding.

On Friday the Bank of England responded by saying that it would 
inject another £40 billion into the system to ease the pressure on 
British banks. Combined with the passing of the US bailout Bill at 
the second attempt, this appeared to buy the authorities a bit of time.

But yesterday's decision by the German Government plunged Europe back 
into turmoil. It is less of a threat to British banks than the Irish 
move as it applies only to retail deposits.

Although the Government has made clear there is an implicit guarantee 
on all personal savings, it is very reluctant to make that explicit 
because of the potential exposure of the taxpayer and the concern 
that it would be difficult to remove once the crisis is over.

But it seems likely that other European countries will be forced to 
follow Germany, increasing pressure on Britain to fall in line.

The Bank of England and the Treasury are also considering a range of 
other measures to shore up the banking system, including the 
injection of taxpayers' money into leading banks and a US-style 
purchase of banks' "toxic" mortgage-related investments.

These were viewed as worst-case contingency plans. After this 
weekend, the worst case appears to be approaching rapidly.
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TELEGRAPH   6.10.08
Germany takes hot seat as Europe falls into the abyss
We face extreme danger. Unless there is immediate intervention on 
every front by all the major powers acting in concert, we risk a 
disintegration of global finance within days. Nobody will be spared, 
unless they own gold bars.


By Ambrose Evans-Pritchard

Investors will learn today whether the Paulson bail-out - fattened to 
$850bn (£480bn) by Congress - can begin to halt the death spiral in 
the credit system. So far, the response looks terrible.

Germany is now in the hot seat. The collapse of a rescue deal for 
Hypo Real Estate on Saturday threatens a ?400bn (£311bn) bankruptcy 
that nearly matches the Lehman Brothers debacle for sheer scale.

Chancellor Angela Merkel has been forced to pull her head out of the 
sand, guaranteeing all German savings, a day after she rebuked 
Ireland for doing much the same thing. Reality intrudes.

During the past week, we have tipped over the edge, into the middle 
of the abyss. Systemic collapse is in full train. The Netherlands has 
just rushed through a second, more sweeping nationalisation of 
Fortis. Ireland and Greece have had to rescue all their banks. 
Iceland is facing an Argentine denouement.

The US commercial paper market is closed. It shrank $95bn last week, 
and has lost $208bn in three weeks. The interbank lending market has 
seized up. There are almost no bids. It is a ghost market. Healthy 
companies cannot roll over debt. Some will have to sack staff today 
to stave off default.
As the unflappable Warren Buffett puts it, the credit freeze is 
"sucking blood" out of the economy. "In my adult lifetime, I don't 
think I've ever seen people as fearful," he said.

We are fast approaching the point of no return. The only way out of 
this calamitous descent is "shock and awe" on a global scale, and 
even that may not be enough.

Drastic rate cuts would be a good start. Central bankers still 
paralysed by a misplaced fear of inflation - whether in Europe, 
Britain, or the US - have become a public menace and should be held 
to severe account by our democracies. The imminent and massive danger 
is now self-feeding debt deflation.

The lesson of the 1930s is that any country trying to reflate in 
isolation will be punished. The crisis will ricochet from one economy 
to another until every one is crippled. We are seeing it play again 
in this drama as our leaders fail to rise above their narrow, 
parochial agendas.

The European Central Bank - which raised rates into the teeth of the 
crisis in July - has played a shockingly destructive role in this 
enveloping slump. Its growth predictions this year have been, and 
still are, delusional. Neglecting its global role, it has vastly 
complicated the fire-fighting efforts of Washington.

It could have offered "cover" to the US Federal Reserve this spring 
when Ben Bernanke was forced by events to slash rates to 2pc. It 
could at least have signalled an end to monetary tightening. That is 
how an ally ought to behave.

Instead, it stuck maniacally to its Gothic script, with equally 
unhappy consequences for both sides of the Atlantic, as well as for 
China, Japan, and India. The euro rocketed yet further, which it turn 
set off an oil shock as crude metamorphosed into an anti-dollar with 
leverage.

The ECB policy was self-defeating, even on its own terms. It merely 
drove headline inflation even higher, while deeper forces of 
underlying debt deflation pulled the real economies of Germany, 
Italy, France, and Spain into a recessionary vortex.

Far from offering reassurance, the weekend mini-summit of EU leaders 
served only to highlight that nobody is in charge of this runaway 
train. There is still no lender of last resort in euroland. The £12bn 
stimulus package is risible.

Angela Merkel has revealed her deep limitations. It was she who 
vetoed French efforts to launch a pan-EU rescue package, suspecting 
that any lifeboat fund would prove to be Trojan Horse - a way of co-
opting German taxpayers into colossal transfers of wealth to Latin 
Europe.

In that she is right, but it is too late now for dysfunctional EU 
political games. By demanding that those who caused the damage should 
pay for it, she crossed the line into caricature, or worse.

Her comments echo word for word the "we're alright Jack" attitudes of 
Euro-pols during the first US banking crises in 1930-1931, until the 
storm hit Europe and the entire cast was swept away by furious 
electorates, or simply shot. Thankfully, this EU stupidity is at last 
drawing serious criticism.
"We have to make sure Europe takes its responsibilities, like the US: 
action must be taken quickly and in a concerted manner," said IMF 
chief Dominique Strauss-Kahn.

As for the US itself, it has not yet exhausted its policy arsenal. It 
can escalate further up the nuclear ladder. The Fed can cut interest 
rates from 2pc to zero. If that fails, it can let rip with the mass 
purchase of US debt.
"The US government has a technology, called a printing press," said 
Fed chief Ben Bernanke in November 2002. (His helicopter speech).

In extremis, the Treasury/Fed can swoop into any market to shore up 
asset prices. They can buy Florida property. They can even buy SUV 
guzzlers from the car lots in Detroit, and mangle them in scrap 
yards. As Bernanke put it, the Fed can "expand the menu of assets 
that it buys."

There is a devilish catch to this ploy, of course. It assumes that 
foreign creditors will tolerate such action.

Japan entered its Lost Decade as the world's top creditor, with a 
vast pool of household savings to cushion the slump. America starts 
its purge with net external liabilities of $3 trillion, and a savings 
rate near zero. Foreigners own over half the US Treasury debt, and 
two thirds of all Fannie, Freddie, and other US agency bonds.

But the risk of a dollar collapse is one for the distant future. 
Right now the world faces the opposite problem. There is a wild 
scramble for dollars as a $10 trillion pyramid of global lending 
based on dollar balance sheets "delevers" with a vengeance.

This is a "short squeeze" on those who have used the dollar for a 
vast global carry trade. International banks are facing margin calls 
on their dollar leverage. It is why the Fed is having to provide 
$1.25 trillion in dollar liquidity for the entire global system, 
according to estimates by Brad Setser from the Center for Geoeconomic 
Studies.

The crisis engulfing Europe, Asia and emerging markets, makes life 
easier for Washington. The United States is becoming a safe-haven again.
The Fed can now hope to pursue monetary stimulus "a l'outrance" 
without being slapped down by the currency, debt, and commodity 
markets. Take comfort where you can.
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LATE NEWS
Financial Times 5.10.08  @11.31pm
Darling plans 'big steps' to aid UK banks
The chancellor is considering a dramatic taxpayer-funded 
recapitalisation of Britain's banks, amid signs of cross-party and 
central bank support for an effective part-nationalisation of the 
sector.  - - - --

David Cameron, writing in Sunday's Financial Times, signals 
Conservative support for "drastic capital measures" which would see 
the taxpayer offering to take an equity stake in banks, to give them 
the financial strength to begin lending again.
"It is possible to imagine the circumstances in which government 
injections of capital, with proper safeguards and strict conditions, 
may be the best way to safeguard the long-term interests of the 
taxpayer," he says.